Uruguay’s Central Bank Increases Benchmark Interest Rate to Combat Inflation

Uruguay’s Central Bank raised its benchmark interest rate from 8.5% to 8.75% to align inflation expectations with its target of 4.5% annually. Year-on-year inflation reached 5.03% in November, with rising core inflation values. Economic growth is projected at 4.1% year-on-year for the third quarter, with expectations for 2024 growth around 3.1%.

In a strategic move aimed at aligning inflation expectations with its target, Uruguay’s Central Bank (BCU) Monetary Policy Committee has increased the benchmark interest rate from 8.5% to 8.75%. This change follows a period of sustained inflation control, with year-on-year inflation recorded at 5.03% in November, marking the longest duration within the stipulated range since the inception of the inflation targeting framework. Despite this positive development, core inflation has risen for the second consecutive month, outpacing general inflation due to an uptick in tradable inflation factors.

The Committee highlighted that while two-year inflation expectations declined to 5.83% in November, a slight uptick occurred in December, bringing the median to 5.89%. Externally, the global economic climate has shown signs of weakening, particularly in advanced economies, contributing to persistent inflation in core components. Notably, the U.S. Federal Reserve has also made adjustments to its interest rates, which may influence market dynamics.

Meanwhile, Uruguay’s gross domestic product (GDP) demonstrated an annual growth rate of 4.1% in the third quarter, with forecasts suggesting a long-term average growth of around 3.4% in 2024. The BCU expects a marginal increase in economic growth, projecting a 3.1% expansion for 2024 following a slight adjustment from earlier estimates. The data reflects a range of analysts’ expectations regarding GDP growth, underscoring a generally optimistic fiscal outlook amid challenges. Also, inflation for 2024 is predicted to stabilize at around 5.37%.

The recent increase in the interest rate by Uruguay’s Central Bank (BCU) marks a significant development in the country’s monetary policy aimed at controlling inflation. The decision follows an analysis of the inflation trends and economic forecasts, reflecting the BCU’s commitment to sustaining stability in the financial environment. Historically, the BCU has utilized interest rate adjustments as a tool to influence economic activity and inflation rates, seeking to align public expectations with established targets. Given the complexities of global economic conditions, these adjustments are essential for maintaining the stability of Uruguay’s economy.

In conclusion, the BCU’s decision to raise the benchmark interest rate signifies a proactive approach towards managing inflation expectations in Uruguay. With inflation challenges and external economic pressures, the need for vigilant monetary policy remains critical. The positive GDP growth projections indicate resilience in Uruguay’s economy, even as the BCU prepares to navigate potential fluctuations in both domestic and international markets. It is expected that through these measures, the Central Bank will continue to work towards achieving its inflation targets while promoting sustainable economic growth.

Original Source: en.mercopress.com